Embedded finance vs banking-as-a-service: What’s the difference?

Two of the biggest buzzwords in fintech and finance right now are embedded finance and banking-as-a-service (BaaS). Despite their popularity, the terms are often misunderstood and frequently used interchangeably.

This confusion is somewhat understandable. The two models work in sync with each other — one powers the backend and the other shapes the frontend. And they both enable businesses to offer innovative financial products without building them from scratch.

But as our EMEA President, Charlie Platt said in his speech at Fintech Talents London: “If a business has the wrong expectations of what embedded finance actually is and can achieve, they set themselves up for disappointment. But with the right ones, they can go out there and meet them.”

The same applies to BaaS.

In this guide, we’ll look at the differences and overlaps between the two — and explore the opportunities for businesses.

Embedded finance explained

Embedded finance integrates financial services like digital wallets, payments, loans, and insurance into non-financial customer journeys.

The most prominent examples are payments on mobile apps like Uber or embedded point-of-sale loans from providers like Klarna.

These products and services may be labeled as embedded payments, embedded lending or embedded insurance. But the underlying technology is the same: Integration via APIs that connect financial products to digital platforms or ecosystems with the goal of providing the smoothest possible customer journey.

But as Vishal Shah, Head of Embedded Finance at SAP Fioneer, said in a recent blog post, “Embedded finance’s end goal isn’t just finance for finance’s sake. This is more than just digital finance like mobile banking or digital payments.”

Instead, says Shah “The motivation should not be integration. It should be: how can I make an experience frictionless for the end-user by enabling them to perform financial activities within their natural habitat? How can I eliminate the unnecessary?”

Embedded finance is not just digital finance. It’s about removing friction and embedding financial tools where they’re most useful.

There are three core elements of embedded finance:

1. Context: Understand the user’s goal. Not just who they are, but what they are trying to achieve.
2. Eliminate: Identify and remove unnecessary steps in the customer journey. This improves speed and satisfaction.
3. Personalization: Use data to tailor the experience. Open banking insights can inform better credit decisions and enable hyper-personalized offers.

The uses cases are virtually endless. The embedded finance market is already valued at US$241mn and is expected to grow steadily at a compound annual growth rate of 23.9% over the next seven years.

Banking-as-a-service explained  

Banking-as-a-service allows licensed financial institutions to offer their infrastructure to non-banks and fintechs.

They offer access to their services via APIs combined with regulatory compliance and operational support.

In other words, BaaS providers facilitate backend banking functions. BaaS consumers take care of the frontend experience. This allows brands and fintechs to offer more to their end customers. For brands, it means they can bundle financial products with their core offerings. Fintechs can create differentiated financial products and customer experiences.

Typically, BaaS customers already exist in the finance space and are looking to further expand and enhance their offering or they are non-banks looking to create a new financial product. Many embedded finance service providers use BaaS for backend support. Likewise, many BaaS providers partner with embedded finance companies to offer frontend capabilities.

Why BaaS matters

Banking services like deposits, payments, and loans are heavily regulated. Traditional banks already have the licenses and networks in place, making them ideal BaaS providers. For non-banks or smaller fintechs, building this infrastructure and meeting compliance needs is costly and time-consuming.

BaaS removes that barrier. It allows companies to integrate and launch financial products faster, without the need to build them, acquire licenses or keep track of evolving regulatory compliance landscape.

Much like embedded finance, the banking-as-a-service market is already substantial and is growing rapidly. The global BaaS market was valued at $19.65bn in 2021 and is expected to grow to $74.55bn by 2030, at a CAGR of 16.2%.

The key differences between embedded finance and banking as-a-service

Frontend vs backend

Traditionally, financial services were distributed and consumed through dedicated, bank-owned channels.

The rise of Open Banking and API banking has transformed traditional banks into BaaS providers. They now offer their technology, compliance and operations as a service bundle, enabling other companies to deliver financial services to their customers.

In this model, BaaS providers and their clients are both focused on delivering a financial service or product. The BaaS provider handles the backend infrastructure while the client builds their customer-facing experience.

By contrast, embedded finance is about making the financial service to fade into the background. The focus shifts from the product to the experience. It’s about delivering the core value proposition to the end user (whether that is a business, person or machine) without disrupting their journey.

Embedded finance enables users to instantly consume personalized financial solutions within the context of a business transaction. These services are seamlessly embedded into the system where the business process is already taking place, making the financial interaction feel natural and intuitive.

Embedded finance: Use cases and benefits  

Most embedded finance use cases are B2C (Business to Consumer). Examples include:

• Mobile retailers
• eCommerce platforms
• Digital businesses
• Fintechs or virtual banks

These services are offering options like embedded payments, loans or insurance at the point-of-sale.

Customers benefit from an improved experience and access to leading financial products when they need them most. Businesses benefit from higher engagement and retention, as well as additional revenue streams. Due to the network effects, financial service providers in turn benefits from access to broader customer bases through digital channels.

Emerging B2B opportunities

In B2B, embedded finance is gaining traction, with several use cases emerging at the intersection of hyper-digitized physical and financial supply chains. According to OECD, global trade is becoming more digital, generating vast amounts of digital transaction data from businesses.

This data enables deeper understanding of end-users and the potential for more personalization and contextual financial services. There is also a rise in embedded finance aggregators (i.e. platforms that bundle multiple services together and offer them with one integration), making it easier for any digital business to essentially become a one-stop-shop for all financial services.

Beyond creating a better user experience, the benefits of embedded finance in B2B include:

• Improved cash-flow management
• Increased product engagement with revenue impact
• Higher customer retention
• Reduced fraud risk

Financial institutions also benefit. They can reach new markets and customer segments to offer differentiated products and customer experiences tailored to specific business needs.

Banking-as-a-service (BaaS): Use cases and benefits  

For the end user, BaaS use cases often mirror those of embedded finance — loans, payments, insurance and wealth management — but also include:

• Bank accounts and digital wallets
• Overdrafts and cards
• Regulatory checks and services like know-your-customer (KYC)

The customers for these products are typically existing financial service institutions (FSIs) like fintechs, banks or businesses building new financial products. Many of these products eventually become embedded finance products down the line.

By partnering with a BaaS provider, companies can gain access to the appropriate banking infrastructure without the cost and complexity involved in building it from scratch. They then have the option to build their own frontend or use the infrastructure to create new and innovative products of their own, or even launch their own bank.   

Even large retailers like Amazon and IKEA are entering the space, building their own banking functions using BaaS.

The benefits for businesses and FSI clients are similar to embedded finance:

• Access to huge amounts of data
• Additional revenue streams
• Faster route to market
• Scalable infrastructure

Similar to embedded finance again, BaaS providers benefit from expanded reach and a considerably larger customer base.

Conclusion: Choosing the right path for you

While embedded finance and BaaS are distinct, they are also deeply interconnected. Understanding the differences is key to building a successful strategy and reaping the benefits of these markets.

Both models require two key ingredients for success: understanding your end-user and finding the right partner.

For both embedded finance and BaaS, you must first ask: What does my end-user want to achieve?

Then, you can figure out what financial tools and data will help them get there.

Finally, you must find the right partner to help you build it.